"Studying the recent experience of Brazil the paper explains how default risk is at the centre of the mechanism through … which an emerging market central bank that targets inflation might lose control of inflation--in other words of the … perverse effect on inflation. We show that the presence of default risk reinforces the possibility that a vicious circle might …

transition from a currency peg to inflation targeting that took place in 1999. The estimated model exhibits quite different … higher inflation and interest rates, and slightly lower GDP. Finally, the first half of 1998 arguably provided a window of …